This Tax Alert is the second in a series of monthly alerts that I will issue to discuss tax legislation in 2025 and the outlook for the Inflation Reduction Act (IRA) renewable energy tax incentives. You can find the first Tax Alert in this series at Renewable Energy Tax Incentives: Opportunities and Risks in 2025: Potomac Law.
The information included in this Tax Alert is written for the purpose of educating taxpayers about the likelihood of possible changes in 2025 to the ITC/PTC rules and the Clean Electricity Production and Investment Credits (ITC/PTC Tax Credits), both through tax legislation and regulatory change. I also discuss current issues taxpayers should consider related to claims for the energy tax credits in 2025, so that they can assess whether claims for these credits will be deemed to be valid by Treasury and the IRS or whether they might be challenged in the future.
To address and mitigate risk from legislative changes, regulatory changes, and IRS review of energy credit claims, this article will discuss 5 ways to mitigate the challenges to the IRA Energy Tax Credits in 2025 and will outline what your company should be doing.
Legislative and Regulatory Change
The uncertain fate of the IRA energy tax incentives in tax legislation this year has significant implications for renewable energy projects, including those that have been placed in service, those under construction, and those on the planning board. The IRA energy tax incentives are likely targets in a tax bill both on policy grounds and as potential revenue offsets for other tax changes. Certain technologies may be targeted by Congress because they are less favored than others.
Legislative Changes: Since Congress is currently working on a comprehensive tax bill that will likely include changes to the IRA energy tax incentives, it is possible that there will be changes to the rules for the ITC/PTC Tax Credits. Those changes could include repeal of the credits, an early sunset of the credits, or changes that would make it harder to qualify for the credits. Changes to the ITC/PTC Tax Credits might be made to affect the credits for certain technologies, but not all technologies.
Prospective vs. Retroactive Changes: Repeal of or changes to any of the IRA tax incentives will likely be on a prospective basis, since historically, retroactive repeal of tax laws has been rare (except in cases of perceived tax abuse) due to the economic uncertainty that would result. This means that any changes included in tax legislation enacted in 2025 would likely not take effect until 2026 (although that outcome is not guaranteed at this point).
This means that projects that were placed in service in 2024 and projects that are placed in service in 2025 would likely not be affected by legislative changes. If deemed appropriate, Congress may also include transition rules for changes that would grandfather projects that meet certain requirements, including, e.g., a binding contract/commitment rule.
Regulatory Changes: It is also possible that regulatory changes could be made that would affect the ITC/PTC Tax Credits, including new rules that would make it harder to qualify for the credits. Regulatory changes could be a result of the Congressional Review Act (“CRA”) process or actions that are taken because of the Executive Order on Deregulation.
The CRA is a tool Congress can use to overturn certain federal agency actions such as Final Regulations. The CRA requires agencies, including the Treasury Department and the IRS, to report issuance of “rules” to Congress and provides Congress with special procedures, in the form of a joint resolution of disapproval, under which they can consider legislation to overturn rules. If a CRA joint resolution of disapproval is approved by both houses of Congress and signed by the President, the rule at issue cannot go into effect or continue in effect. Any regulations repealed in this manner cannot be reissued in substantially the same form.
The EO on Deregulation creates a regulatory freeze on all executive departments and agencies to review pending and existing laws and regulations. The freeze mandates that unpublished rules be withdrawn and unenacted rules be delayed. Repeal or modification of final regulations would require compliance with government notice and comment rules.
If the Final Regulations on Section 48 or Sections 45Y/Section 48E are withdrawn for any reason, that does not mean that taxpayers are not able to claim these credits. It does mean that taxpayers would not be able to rely on the withdrawn guidance for purposes of qualifying for or claiming the credits.
Impact of Executive Orders: It should be noted that tax credits such as the ITC/PTC Tax Credits are not funded by funds appropriated by Congress, so they should not be directly affected by the Executive Orders that have been issued by President Trump impacting IRA funding for energy projects, although these EOs may disrupt progress on energy projects for which claims for tax credits are planned. The Tax Credits can only be changed by new legislation approved by the Congress. The EOs, however, signal that the Trump Administration may attempt to change the implementation of the IRA tax incentives, which could affect, for example, the Final Regulations issued on the Sections 45Y and 48E credits.
Status of the IRS Energy Tax Credit Guidance
- The Final Regulations on Section 48 and the Final Regulations on Sections 45Y/48E were issued within the timeframe which makes them potential targets of the CRA process.
- The Final Regulations for the Low-Income Communities Bonus Credit are also a potential target of the CRA process. That means they could be withdrawn.
- The Final Regulations on the Prevailing Wage and Apprenticeship rules, the Direct Pay Election rules, and the Credit Transfer rules are outside the timeframe so they cannot be withdrawn through the CRA process.
- Guidance related to the other bonus credits including the Domestic Content Bonus Credit and the Energy Communities Bonus Credit was issued in the form of notices, so that guidance could be pulled at any time.
5 Ways to Mitigate Challenges to the IRA Energy Tax Credits in 2025
1. Be vigilant about monitoring news, agency guidance, and communications from the Administration and the Congress
Congress is developing tax legislation and details about the specifics will become public over the next few months. You must stay current on this information including the consideration of transition rules, binding commitment rules, and early sunset dates. Similarly, you need to be aware of any regulatory changes announced by the government. You can depend on trade associations and tax professionals to help keep you updated.
2. Follow the Rules: Documentation, Recordkeeping, and IRS Audits
At the beginning of 2025, there was a view that IRS audits of energy tax credit claims would be coming soon, since taxpayers were able to start claiming the credits in 2023. Due to the actions of the Administration to significantly downsize the government including the IRS, there is now doubt about whether that will occur possibly resulting in a delay in energy credit audits. Companies, however, should assume the possibility of audits in the future and be prepared, including audits focused on the bonus credits, credit transfer deals, and direct pay claims.
Follow all the rules for qualifying for the tax credits very carefully which means you must understand the current regulatory guidance. Comply with any “safe harbor” rules and document carefully if you met the “begin construction” rules. It is unlikely that the 2025 tax bill will change the “begin construction” rules even if they do modify the Clean Electricity tax credit rules.
Perform due diligence on activities related to your energy tax credit claims to ensure qualification. If there are other parties involved in meeting the tax credit rules, perform due diligence to make sure that they comply, e.g., with the Prevailing Wage and Apprenticeship rules that are generally required to be met for the enhanced 30% credit. Ensure that your contracts with other involved parties detail the rules they must meet to support your claim for the tax credits.
Documentation and recordkeeping is key and must be performed both by the taxpayer claiming the tax credit and any parties supporting the taxpayer’s claim. Contemporaneous recordkeeping is the best approach so that you are prepared for an IRS review of the claims in the future. This will allow you to be prepared to mount a strong defense of your tax credit claims
3. Contracts and Indemnification
Make sure that your contracts with other parties that involve tax credit claims include strong “change in tax law” provisions covering the possibility of both retroactive changes and prospective changes. Negotiate strong indemnification provisions in your contracts with other parties involved in your tax credit claims if they fail to comply with the rules.
For projects begun in 2025, consider the possibility that tax legislation will include “binding commitment” transition rules, and ensure that when you move forward with new projects that you meet the definition of “binding commitment.”
For credit transfer transactions, the buyer will also need strong indemnification provisions in the event of an IRS denial of the tax credit or if recapture occurs, since the buyer bears the risk of credit disallowance or recapture.
4. Legal Opinions and Tax Insurance
If you are currently involved in projects or marketing to customers who are developing projects, and you are uncertain about whether the project will qualify for the energy tax credits, consider engaging a law firm to issue a legal opinion or a legal memorandum based on the facts of your project. This will give you and your customers assurance that your interpretation of the statute and the regulatory guidance as applied to your facts is accurate and will be upheld if reviewed by the IRS.
Tax insurance has become more common for renewable energy tax credits, including with respect to credit transfer transactions. Involved parties may require a legal opinion to proceed with a tax insurance transaction.
For credit transfer transactions, consider obtaining tax insurance to cover disallowance or recapture of tax credits. Consider whether your tax insurance policy will cover retroactive and prospective changes in the tax law.
5. Tariff Strategy and Tax Planning
Due to the Administration’s evolving tariff landscape and the resulting uncertainty, businesses should be considering strategies to reduce the impact of tariffs, but direct and indirect tax consequences must be considered especially regarding supply chain modifications. There may be opportunities that arise when the consequences of the tax impacts are considered but there also may be serious tax risks that result. In the countries they may be “leaving” and new countries where they plan to operate, companies should consider issues such as “exit taxes,” income taxes, indirect taxes, withholding taxes, treaty networks, and employment laws that require severance payments or penalties. US-based companies must review tax consequences due to the US tax laws including the transfer pricing rules.
Do a careful and ongoing review of your current supply chains and the potential impact from tariffs, while ensuring that your contracts address the issues of tariff and tax law changes.
What Should Your Company Be Doing Now?
- Monitor legislative, regulatory, and judicial developments in 2025.
- Ensure that you understand the current rules for any tax credits you are planning to claim based on the statute and any applicable guidance that was issued by the Biden Administration prior to January 20, 2025.
- Be aware of the potential impact of the use of the Congressional Review Act or the EO on Deregulation to repeal or modify guidance that has already been issued and whether that will impact projects for which you plan to claim credits.
- Make sure that you comply with all the rules that are currently in place for the projects you intend to file claims for including all rules in all applicable guidance that has been issued.
- Keep detailed records about your compliance with the current rules for the tax credits in the event your claims are challenged in the future by the IRS.
- If you are notified by a customer that you must stop work on a project or pause your work because of federal funding issues, keep good records of the communications on this topic and document if you can what the impact is on your participation in the project, timing of the project, incurred costs, and any disruption to the filing of tax credit claims.
- Evaluate how current projects and planned projects could be impacted by changes to tax credits that might be used by these projects and incorporate these risks in project modeling and documents. Document your assessment.
- Consider the impact on the timelines for projects based on potential changes to the IRA tax credits and the ability to accelerate projects should the rules change so that you can take advantage of effective dates for changes and transition rules.
What are the Risks for ITC/PTC Credits and the Clean Electricity Credits?
A key question is what the fate will be of the new “technology-neutral tax credits” in Sections 48E (ITC) and 45Y (PTC). These new credits are effective from 2025 to 2032, replacing the current law Section 48 ITC and the Section 45 PTC, which terminated at the end of 2024.
The new credits benefit facilities/projects that achieve net zero greenhouse gas (GHG) emissions regardless of the technology used, with taxpayers generally required to track emissions to be eligible for the credits. Final Regulations that were issued in January of 2025 deem certain longstanding clean energy technologies to be categorized as zero-GHG emissions facilities, including solar and wind projects.
Possible legislative changes: If these new credits become a target, it is possible that the life of these credits could be shortened so that they sunset prior to the current expiration date. Alternatively, the rules could be changed so that it is harder for taxpayers to qualify, especially for technologies that are not favored by some Republicans, such as offshore wind projects.
“Begin Construction” Safe Harbor: The expiring ITC (Section 48) and PTC (Section 45) credits are only available to projects that “begin construction” before 2025 (even if placed in service after 2024), while those that begin construction and are placed in service after 2024 are transitioned to the new credits, Section 48E and Section 45Y.
What are the risks to projects that meet the Safe Harbor? Because the Section 48 and Section 45 credits expired at the end of 2024 and are only available in 2025 to projects that meet one of the two “begin construction” tests (including the 5% safe harbor test related to total cost of the project and the physical work test) and are placed in service in 2025, it is likely that claims for the Section 48 ITC and the Section 45 PTC are less at risk due to legislative changes in 2025. Although regulatory changes are possible as explained in this document that might need to be addressed for such claims, that risk seems low.
The risk to projects where the new 48E and 45Y credits will be claimed is higher, since there is a greater risk of legislative changes and regulatory changes. If you have a project that qualifies in 2025 for either the old credits or the new credits, you should ensure that you are monitoring legislative developments in 2025 in deciding which to claim.
If you have any questions about the information in this Tax Alert or need assistance on energy tax issues, please contact Susan Rogers at srogers@potomaclaw.com.
Note: This publication is distributed with the understanding that the author, publisher and distributor of this publication and/or any linked publication are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.
